National Post (Latest Edition)

TORONTO STARTUP TARGETS ART OF THE DEAL.

The pandemic has rekindled interest in daily-deal sites — and one Toronto startup is hoping to take advantage

- Vanmala Subramania­m For more news about the innovation economy visit www. thelogic. co

In the fall of 2017, Ghassan Halazon set his eyes on a target: the ailing dailydeals company Wagjag, then owned by media giant Torstar, had been struggling to compete in the saturated discount e- commerce space, dominated at the time by Groupon.

Wagjag offered discount deals on everything from groceries to spas and restaurant­s to vacations. Halazon, though, was focused less on its dwindling business than on the market data it had accumulate­d because of the variety of consumer segments in which it operated. Torstar, too, was underperfo­rming — and Halazon believed it was unable to give Wagjag the resources needed to scale up its business. The company he had just founded, Emerge Commerce, acquired Wagjag in November 2017 for just $ 500,000. “We got it for pennies,” Halazon told The Logic. “It was a loss-making, shrinking business, and we made our capital back in four months.” In just three years, Halazon claims, Emerge turned WagJag into a cash-flow positive operation, driving over $ 30 million in sales.

Still relatively unknown in the Canadian tech sector, Emerge is enjoying something of a coming- out party ahead of its public- market debut on the TSX Venture Exchange in the coming weeks. Halazon wouldn’t specify when the company would begin publicly trading, but said it raised approximat­ely $ 10 million in a virtual roadshow over the summer, in addition to a $ 5- million private placement led by investment firms Canaccord Genuity and Gravitas. The go- public will take place via a reverse takeover, and is expected to value Emerge at $45 million, according to Halazon.

Its modus operandi is simple: acquire small- to medium- sized e- commerce businesses whose founders are looking for an exit opportunit­y, and reduce their operationa­l costs by leveraging the existing technology and data in that business, to the benefit of all the firms under the Emerge umbrella. So far, its acquisitio­ns have focused on the daily- deals sector, where, in addition to Wagjag, it owns Buytopia, Shop. ca and golf-deals site Underpar.

Data crunched from WagJag’s purchase and browsing history, for example, let Emerge’s data scientists glean how sticky the golf market was, which eventually led to Emerge purchasing UnderPar for $ 12 million in late November 2019. Owning both Wagjag and Underpar then gave Emerge the advantage of being able to cross-advertise on both those platforms — mothers on Wagjag, a primary audience, were targeted with Father’s Day ads for golf-related purchases on Underpar.

“We are sitting in the middle of this huge virtual mall. With thousands of buyers, we get a glimpse into how various consumer verticals perform, and it almost gives us an unfair advantage in understand­ing how these categories stand out,” Halazon said. Emerge has been a beneficiar­y of the pandemic. E- commerce growth has exploded, and there’s been a resurgence of consumer interest in the daily- deals sector. Groupon’s stock, for example, surged a remarkable 80 per cent to a peak of US$ 35 in the first two months of the pandemic, before settling at around US$20. At its height, back in 2011, the company was one of the hottest tech companies in the world, with a stock price of over US$500.

According to Mi ke Lauzon, head of Canaccord’s technology group, there was a lot of investor interest in Emerge when talks began on taking the company public. Canaccord, along with Haywood Securities and Gravitas, are underwrite­rs on the reverse takeover.

“Anything that benefits from the pandemic — remote technology, e- commerce — is getting a huge amount of attention. I think when their stock starts trading in the next month, it will really put them in a position to accelerate their acquisitio­ns because they will have much more cash on hand,” Lauzon told The Logic.

He is one of the most seasoned bankers in the technology sector, and has known Halazon and Emerge chair Drew Green for almost a decade. Green, who is also chief executive of Indochino, used to head up the deals site Shop. ca before it was acquired by Emerge. It was only when the Underpar acquisitio­n was completed that serious discussion­s about Emerge’s potential as a public company began, Lauzon said.

“Golf is a tremendous vertical that is in a really interestin­g spot to take advantage of at least for the next few years. It’s a safe, socially distanced sport, and the interest towards golf can only increase going forward,” he said.

But one longtime investor, who runs a family office in Toronto, points out that there’s a certain risk that comes with running dailydeals businesses because that consumer segment was not performing particular­ly well prior to the pandemic.

“I do have concerns around the structural sustainabi­lity of the deals segment, because the excitement right now is more just a temporary pull in demand. People have lost jobs, salaries have been cut, so you can see why discount deals are appealing,” said the investor, who spoke on the condition they not be named because they were not authorized to speak publicly about the company.

Halazon, however, argues that that’s exactly why businesses like Emerge exist. Daily- deals companies have notoriousl­y underperfo­rmed because their back-end operations — like marketing, targeted- ad placement, and accumulati­ng sophistica­ted analytics on consumer segments — are costly.

“Even if you’re number one in a small market like Canada, that’s just not enough to achieve a homerun exit. We substitute the exorbitant customer acquisitio­n cost that typical e- commerce companies endure through a high spend on marketing, Google and Facebook,” he said.

Emerge’s revenue in 2019 was between $10 million and $25 million, but Halazon insists that figure doesn’t accurately reflect the financial health of the company. He points at gross merchandis­e value, a number that captures the total amount of merchandis­e sold in a given period. “I’ll tell you that our GMV is a number that’s quite higher than our revenue.” Perhaps more clearly, if a customer purchases a $ 100 voucher to play golf, Emerge collects 20 to 25 per cent on that purchase. Halazon said Emerge has been EBITDA- positive for two years in a row, although he would not disclose an exact figure.

Indeed, it is tempting to compare Emerge with a private equity company — buying up struggling businesses, lending them operationa­l efficienci­es and institutin­g a careful capital- allocation strategy that lends discipline to its financial governance. Halazon rejects that comparison, saying he believes in the businesses his company acquires and wants to bring them value.

“Look, there are simply too many small e-commerce operators that cannot afford to scale up, because it’s expensive and they are competing with giants like Amazon and Walmart,” he said. “On the flip side, there are too few buyers of these businesses.”

For now, distressed brickand- mortar retailers that operate online platforms and are in need of buyers aren’t exactly the target market that Halazon is eyeing. “We don’t really have the expertise to do that right now. Plus we don’t want to operate in a space where inventory costs are significan­t,” he said.

A company that is perhaps comparable to Emerge is Thrasio, an American e- commerce acquirer that exclusivel­y purchases Amazon third-party private-label businesses. Thrasio made 17 acquisitio­ns during the pandemic alone, achieving unicorn status in July, after a $ 260- million funding round led by global private equity investor Advent Internatio­nal.

Halazon doesn’t really see Emerge as a competitor to Thrasio, arguing that there are plenty of small Canadian e- commerce businesses outside the Amazon ecosystem ripe for acquisitio­n.

“Investors ask me how I’m going to compete with Thrasio and Amazon and Shopify, and I’m quick to point out that I would love nothing more than those millions of Shopify merchants to continue multiplyin­g. The more high- quality bootstrap players are out there building on Amazon and Shopify, the more acquisitio­n opportunit­ies lie for us.”

we made our capital back in four months.

 ?? Courtesy Emerge Comerce ?? The modus operandi of Ghassan Halazon’s Emerge Commerce is to acquire small- to medium-sized e- commerce businesses whose founders are looking to exit and reduce operationa­l costs by leveraging technology and data in that business to the benefit of firms under the Emerge umbrella.
Courtesy Emerge Comerce The modus operandi of Ghassan Halazon’s Emerge Commerce is to acquire small- to medium-sized e- commerce businesses whose founders are looking to exit and reduce operationa­l costs by leveraging technology and data in that business to the benefit of firms under the Emerge umbrella.
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